Fortescue Metals is delaying $US1.6 billion in expansion plans and says it is cutting several hundred jobs in the process.

Australia's third biggest iron ore producer has cut its near term expansion target from 155 million tonnes of iron ore per year to 115 million tonnes, citing the recent slump in iron ore prices.

The company will continue its plans to expand the Christmas Creek mine and the lower-cost Firetail deposit at its Solomon mine, but will defer development of the Kings deposit at Solomon.

It will also delay the completion of its fourth berth at Herb Elliott Port until iron ore prices rise to higher levels.

The move will lower Fortescue's planned spending from $US6.2 billion to $US4.6 billion for the current financial year.

Fortescue chief executive Nev Power says staff numbers and other operating costs will be cut immediately.

"In particular we will be reducing staff, consultants and contractors involved in future development work and non-essential work," he said in a briefing.

"In total there will be a reduction of several hundred staff and several hundred contractors across the business."

The miner expects savings from the operational cuts at its Cloudbreak mine to total around $300 million.

"The cost reductions from existing operations combined with the introduction of low-cost ore from Firetail will strengthen our position as a low-cost producer," Mr Power said in a statement.

"These measures reflect the company's ability to reduce and delay cash expenditures to meet market conditions and provide us with headroom in the event of further deterioration in iron ore prices."

The company says it is also in advanced negotiations regarding the sale of its Solomon power station, and in discussions regarding the partial sale of its North Star magnetite project.

Mr Power says it is a short term issue and expansion is expected to resume once the market becomes stable once again.

Late last week, iron ore spot prices in China touched a near three-year low of $US88.70 per tonne, and have only edged a touch higher to $US89.10 at the start of this week.

Iron ore spot prices have more than halved over the past year, and fell by almost a quarter over the past month alone.

Citi Index's chief market analyst Peter Esho says iron ore producers are starting to flex their muscles in an attempt to put a floor under prices.

"The Australian producers have become aware of the demand side scaremongering over the past few weeks and have now decided to flex their muscles - Fortescue the first to caution on supply but cutting its guidance and deferring capital expenditure," he noted.

"We are likely to see BHP and Rio Tinto following on from Fortescue and cautioning against the supply of their ore in order to support the iron ore price. Each company will have its own way of going about achieving this, not all will follow in the same way Fortescue has."

Fortescue says it remains confident that the fundamentals of the Chinese economy are strong, and that iron ore prices will recover.

A senior resources analyst Gavin Wendt agrees and says he expects the price to pick up towards the end of the year.

"I think it's unlikely that we're going to see iron ore prices go back to the sorts of levels that we saw prior to the GFC," he said.

"But, I think the long term fundamentals for iron ore are still very strong and I think we're going to see prices firming up again probably from about October onwards into early 2013."

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